Most businesses find double-entry bookkeeping more advantageous for complex accounting, but a sole proprietorship with limited cash may find single-entry bookkeeping more expedient and convenient. The Internal Revenue Service prefers double-entry bookkeeping using the accrual method, but a new company with few transactions can pull the information the IRS requires from a single-entry bookkeeping system.

Double-Entry Bookkeeping

Double-entry bookkeeping is preferable to single-entry bookkeeping for almost all businesses. In double-entry bookkeeping, you record two journal entries, a debit and credit, for each transaction. This system uses income statement accounts, which are the same accounts used in single-entry bookkeeping. But double-entry bookkeeping also uses balance sheet accounts -- assets, liabilities and equity. Assets are what your business owns, liabilities are what your business owes and equity is the owner's stake in the company. You can use cash basis accounting, recording entries when cash changes hands, or accrual basis accounting, recording transactions when they occur, in double-entry bookkeeping.

Double-Entry Advantages and Disadvantages

The disadvantage of double-entry bookkeeping is that you must learn how to do it or hire a professional. Financial software reduces the learning curve by letting you record logical transactions that it assigns to the proper accounts. For example, record an invoice and the software debits accounts receivable and credits revenue. Record a received payment and the software credits accounts receivable and debits cash. This is accrual basis accounting.

The two journal entries communicate that your customer owes you money (accounts receivable) that you have earned (revenue) because you delivered the ordered goods. When you receive payment, you credit accounts receivable and debit cash. These two journal entries communicate that you are no longer owed the money because you have received payment.

Advantages of double-entry bookkeeping include the IRS' preference for it, built-in checks and balances to prevent errors and the ability to see your company's financial position.

Single-Entry Bookkeeping

Using a single-entry bookkeeping system is practical if you are just starting your business, are not ready to purchase accounting software and do not understand double-entry bookkeeping. In single-entry bookkeeping, you use cash basis accounting to record entries when cash changes hands. All of your entries belong to one of the income statement accounts, revenue or expenses. Revenue is money you earn and expenses are money you spend.

Single-Entry Advantages and Disadvantages

The advantage of single-entry bookkeeping is the simplicity to record a single entry, cash receipts (revenue) or cash disbursements (expenses), for each transaction. The many disadvantages include no IRS compliance, limited financial information, no checks and balances to insure accuracy and no way to demonstrate the financial status of your company for creditors.

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About the Author

Based in New York, Kate Bluest has been writing for various online publications since 2005. She has participated in several writing workshops, including the MIT Writing Workshop. Bluest holds a Bachelor of Science in business administration from SUNY Empire State College.